The UK economy rebounded in January, posting modest growth after falling into a technical recession in the second half of last year.
Gross domestic product rose 0.2% after falling 0.1% in December, the Office for National Statistics said on Wednesday. Growth in services and construction compensated for the fall in industrial production.
The figures mean Britain is on track to grow in the first quarter overall, resulting in recession by the end. It is a boost for Prime Minister Rishi Sunak as he tries to challenge opinion polls that show his Conservative Party suffering a heavy defeat in a general election expected later this year.
“The economy picked up in January, driven by strong growth in retail and wholesale trade,” said Liz McKeown, director of economics at the ONS. “Construction also went well, with home builders having a good month. This was partially offset by declines in television and film production, lawyers and the often volatile pharmaceutical industry.”
What Bloomberg Economics Says…
“The mild recession that hit the economy late last year has ended. Growth is likely to accelerate in the first quarter of the year, and we are revising our 1Q24 forecast to 0.2% from a 0.1% fall as a result. A recent report showed that the Bank of England is in no hurry to ease policy, and signs of recovery give it the opportunity to wait a little longer for confirmation that inflation is on track for a long-term return to 2%. We are moving the timing of the first rate cut from May to June. — Ana Andrade and Dan Hanson, Bloomberg Economics.
However, the recovery is likely to be modest as past interest rate hikes continue to weigh on households and businesses. Analysts expect the UK to lag behind all other G7 countries except Germany for another year.
WITH labor market With colder weather and data next week expected to show a sharp slowdown in inflation, investors are betting the Bank of England will start cutting rates in August from their highest level in 16 years. Markets are currently forecasting a four-quarter point decline over the next year.
Following the publication, the pound remained stable at around $1.28. It rose to $1.2894 last week amid signs the UK economy is holding up better than many feared. Sterling is the best performing currency among Group of 10 peers this year as the Bank of England is expected to keep interest rates higher for longer given the recovery in economic growth.
“The economy may be at a turning point,” said Ben Jones, lead economist at the CBI, the country’s largest employer group. “Momentum is likely to remain weak in the short term, but the outlook for this year is improving.”
Growth in January was supported by strong retail sales as a 2 percentage point cut to National Insurance payroll tax took effect and boosted disposable income.
Households, already enjoying a return to real wage growth, can expect further increases in April after Chancellor of the Exchequer Jeremy Hunt announced another 2-point cut to national insurance contributions in his Budget last week. Minimum wage workers will also receive a nearly 10% raise.
“We are making progress on the economy, part of which is to cut National Insurance contributions by £900 in the coming year,” Hunt said in a statement after the report. “But if we want growth to increase, we need to make work gainful, and that means ending the unfair double taxation of work.”
Growth in January was influenced by the junior doctors’ strike, which contributed to the largest number of lost days to strike from September.
Retail trade rebounded strongly from a disappointing December, rising 3.4% in January, helping support growth in services that month. Car repairs also contributed to improving the quality of services.
Health care spending rose 0.9%, led by private health care, while professional services had a slow month with activity down 0.9%. Education grew by 0.7%.
Construction rose 1.1% for the month, beating economists’ forecasts, as private builders resumed work after the Christmas shutdown.
Industrial production is experiencing a decline in water supply and sanitation. Manufacturing and energy supply made no contribution.
The trade deficit widened by 2.2 billion pounds ($2.8 billion) to 13.8 billion pounds in the three months to January, roughly in line with last year’s quarterly deficit. The slightly larger deficit was due to a “significant fall in services exports”, which was partly offset by a smaller deficit in goods.
Exports of goods fell, but imports fell even further, the ONS said. He added that there was no evidence that shipping disruptions in the Red Sea had affected imports in January.
The UK remains increasingly reliant on imports of goods from the EU, which in January were £5.8 billion higher than imports of goods from non-EU countries, according to the ONS. Imports from non-EU countries have been declining steadily since October 2022. Exports of British goods to the EU and non-EU countries have remained roughly the same this month.
“The technical recession that the UK fell into at the end of last year will be short-lived,” said Sanjay Raja, chief UK economist at Deutsche Bank. “We should see growth gradually return to its trend pace over the course of the year as sentiment continues to rise and fiscal and monetary policy are eased through 2024.”